By Marilou Vroman, CPA, CFE
In working with many dealerships, I have observed a wide spectrum of the levels of internal control. Some dealerships enforce strict protocols, processes, and procedures, whereas others exhibit a more relaxed stance. It is clear that environments with weak controls are at greater risk of fraud than their well-structured counterparts.
A prevalent weakness we often encounter in examining internal controls concerns the transaction approval process. Dealerships rely on managers and staff to act in their best interest, placing inherent trust in them. Yet would it be wise to leave an unsigned check in the showroom, permitting expenditures without justification or proper approval? This hypothetical situation unfolds regularly.
In the vehicle sales department, vehicles often require repairs or accessory installations. The norm requires an inspection, get ready form or due bill to be prepared for each car, outlining necessary work to be done for vehicle safety and to prepare the vehicle for retail sale. The sales department absorbs repair costs into the cost of inventory while the vehicle is unsold or through variable gross profit and we-owe agreement at time of sale. If costs are incurred after the time of sale, the repairs generally are generally charged to variable gross profit or policy expense. In all instances, the authorizing manager should receive an estimate before approving the repairs, just as a retail customer would, and provide written approval for the repairs to be performed and the dollar amount approved.
What happens when repairs commence based on vague approvals like "per Lenny" or without any definitive authorization? This oversight failure effectively provides unrestricted power to the shop, allowing it to impose any charges for repairs. While a shop should not take advantage of this situation, and some sales managers diligently oversee charges to vehicle inventory, they may overlook the details of what is being charged from a repair order to a vehicle. In a busy environment with high volume vehicle sales, it is easy for unauthorized charges from repair orders to go undetected.
As an example, we have observed several instances where a technician is flagged excess labor hours for a labor operation to increase the compensation to a technician at the used car department’s expense without the need to change a pay plan or get a general manager’s approval for an extra bonus. As a second example, we have seen parts billed to a vehicle which were made for a different type of vehicle and did not fit the vehicle stated on the repair order, simply to move a part out of inventory. The part was deemed to have been installed on another vehicle at no charge or stolen. As a third example, we have found vehicles charged twice for the same repairs without the sales department recognizing the error until we brought it to their attention. All of these are examples of losses to the dealer which accumulate to substantial amounts over time.
Without proper approvals and controls, these expenses can inadvertently slip through the system and be overlooked. A few steps to take are as follows:
· Require written estimates from the shop for reconditioning and accessory installations.
· Document management approval for internal charges with a signature on the workorder.
· Require a management signed Get Ready, Avoid Verbal Orders (“AVO”) We-Owe, or Due Bill form detailing authorized repairs to commence work and archive with the related repair order.
· Monitor charges to stock regularly and validate against service estimates for appropriateness and challenge what appear to be excess labor hours or unusual part numbers.
· Request a report of internal charges to departmental gross profit, policy expense monthly
· Investigate and challenge excess charges against we-owe accounts.
Banks reject unsigned checks; in parallel, sales and service departments must maintain similar standards of authorization.
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